A Dismal Outlook from ‘Not a gay Science’

“Not a “gay science,” I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.”

I’ve been perusing several economic sources for better news since this Monday’s GDP growth announcement for the 4th quarter was higher than anticipated.  This was mostly due to a better of inventory re-ordering and really didn’t set any one’s hair on fire.  The markets were up so I was thinking maybe the budget announcement today was going better than I thought possible.  Serves me right to try to be an optimist among dismal scientists.  I think I would characterize the market today as slap happy.  What I found in the devilish details follows and, of course, mostly sourced from the British Press whose economy is so wrapped up with ours they could hardly be wishing us harm.
I introduced you to the Volcker Rule which is a modest attempt at reviving something akin to the Glass Steagall Act of 1933. The Financial Times is reporting that the Senate will either ‘significantly modify’ or drop the rule. Evidently the new spirit of bipartisanship is the same as the old spirit of bipartisanship, the Republicans say no to everything responsible and reasonable and the Democrats cave immediately. As I said, the proposed regulations are tepid by the old standards but still too much for the laissez-faire Republicans who would rather enable monopolies than promote true market capitalism. I thought we had basically had it with the excesses of Reagan Bush Crony Capitalism and voted the buggers out. Silly me!

Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

However, Shelby said he expects to hold a meeting with Banking Committee Chairman Chris Dodd (D-CT) regarding the way forward on regulatory reform in two weeks time. A Democratic banking committee staffer confirmed that the meeting between Dodd and Shelby will be critical as Dodd needs to determine the level of bipartisan agreement and the timing of bringing the bill through committee and on the Senate floor.

With the election of Republican Scott Brown to the Senate, the Democrats no longer have the necessary 60 votes to force through a Regulatory Reform package, and any bill will need at least some Republican support to pass. A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.

“Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan,” the staffer said. “He is not going to risk bipartisan support to make the White House happy.”

The Democratic staffer said there is an ongoing debate among members of the banking committee about whether the Volcker rule would effectively push risk out of regulated markets and thus ultimately create more risk to the financial system.

HuffPo is even reporting that Frank Luntz is penning memos that demonstrate a willingness to kill any attempt to regulate anything in the financial services sector which is akin to showing the barbarians the secret location to your daughters and silver during a Viking raid. It’s a virtual talking points instruction memo for enabling moral hazard via active promotion of information asymmetry.

Nine months after he penned a memo laying out the arguments for health care legislation’s destruction, Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform.

In a 17-page memo titled, “The Language of Financial Reform,” Luntz urged opponents of reform to frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy.

“If there is one thing we can all agree on, it’s that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated,” Luntz wrote. “This is your critical advantage. Washington’s incompetence is the common ground on which you can build support.”

Luntz continued: “Ordinarily, calling for a new government program ‘to protect consumers’ would be extraordinary popular. But these are not ordinary times. The American people are not just saying ‘no.’ They are saying ‘hell no’ to more government agencies, more bureaucrats, and more legislation crafted by special interests.”

If these things come to pass, you might as well give Bernie Madoff a get out of jail free card. His crimes and misdemeanors will seem paltry compared to what will come. If you were hoping to buy yourself out of indentured servitude from your privateering financial middle man with your own well paying job (we should all have those $100,000 million dollar bonuses for acting on government tips), forget it. CEA Chair Christina Romer has dropped the other shoe on the unemployment data. I knew that structural unemployment was bad, but I had no idea until this came out. (Yes, it’s The Economist, again. Why oh WHY do I have to consult the foreign press to get to the bottom of things?) I have no idea where they are going to find customers for businesses or tax receipts for government with this nasty bit of data.

OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president’s Fiscal Year 2011 budget. Ms Romer explained the economic assumptions underlining the budget forecasts. She noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections.

She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration’s forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.

Deficit reduction has a lot to do with the strength of the economy.  It also has a lot to do with people finding jobs so they pay taxes and buy things that also come with taxes.  Balancing the budget with this kind outlook for unemployment is playing Russian roulette with more than one bullet in the chamber.   Increasing taxes is likely to choke off a recovery but so is any increase in interest rate that could come from a skittish market that doesn’t fell comfortable with the Orzag scenario presented today of a budget deficit coming in around 10% of output eventually even though the Obama administration says that level is unacceptable and wants to bring down to 3%.  However, we put the national defense budget off the table along with medicare and social security so there’s really no place to go.  Even sunsetting the Bush tax cuts that went to households over $250,000 at this point isn’t going to cut it.  We’ve had 8 years of two wars and no war bonds sold to any one.  The silly thing compounds, you know, even when the interest rate is low.  Where’s Cheney with his deficits don’t matter mantra now?

If this is the most likely or the best scenario, consider my investment advice to be a gun and a rocking chair for the front porch. Oh, and make a big ol’ fort like fence around your Michelle Obama Organic Nutritious Great Recession Victory Garden. You’re going to have to use the butter and eggs money for your bullets.